Why No One Blames the Lawyers

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BLAME GAME OCTOBER 14, 2002

Why No One Blames the Lawyers

By late last summer Roy Olofson, then the vice president of finance for Global Crossing, was convinced something was rotten with the company's books. Hit hard by the deflating telecom bubble, Global Crossing, Olofson suspected, had begun using a range of accounting tricks to artificially inflate its revenue statements. So on August 6, 2001, he sent a five-page letter to the corporation's general counsel, James Gorton, outlining his concern that company shareholders and bankers, as well as the Securities and Exchange Commission (SEC), had been intentionally misled about the organization's financial health.

Faced with Olofson's accusations, Gorton asked Global Crossing's outside counsel, the New York law firm of Simpson Thacher & Bartlett, to launch an independent inquiry. After conducting a round of interviews and reviewing company documents, the firm reported its findings back to Gorton. On February 4, 2002, Global Crossing issued an official statement asserting that after "consultation with outside counsel," management was confident that the company's accounting methods had been appropriate and that it had made adequate disclosure both to the public and to the SEC. The "allegations made by Mr. Olofson were without merit."

Today, of course, it seems clear that the folks at Simpson Thacher missed a few details. Global Crossing is under investigation by both the SEC and the U.S. Attorney's office in Los Angeles for possible accounting and disclosure improprieties. The New York attorney general is scrutinizing the company's relationships with East Coast banks, securities firms, and analysts, while the Labor Department examines its employee stock policies. Some four dozen class-action suits alleging violations of securities law have been filed, along with 15 suits regarding the company's handling of employees' retirement plans. This week both Gorton, who left the firm early this year, and Chairman Gary Winnick appeared before a House Energy and Commerce subcommittee to discuss—among other things—the contents of Olofson's letter. Meanwhile, having filed for the fourth-largest bankruptcy in history this January, Global Crossing is scrambling to get a federal judge to approve a reorganization plan that will allow the company to survive. 

What about all that "consultation with outside counsel"? Apparently, Simpson Thacher's review followed the see-no-evil model that Vinson & Elkins made famous in its review of Enron (for which, among many other alleged misdeeds, the Houston-based law firm is now being sued). The Simpson Thacher team not only failed to contact Global Crossing's board of directors and its outside auditor, the now-defunct Arthur Andersen, it didn't even interview Olofson. Rather, attorneys relied largely on information provided by a handful of company executives, many of whom may have been involved in—or knowingly benefited from—the schemes in question. (Gary Winnick, for instance, is accused of cashing in on the company's inflated stock, pocketing hundreds of millions of dollars before the collapse.)

But as subpoenas are issued, briefs filed, and Global Crossing self-destructs in spectacular Enron style, it's business as usual at Simpson Thacher. The firm faces no threat of legal action from the government or the public, and Congress has no plans to compel the firm's lawyers to explain their "external review." This, despite the fact that, as the Los Angeles Times noted in late February, the cozy relationship between Global Crossing and Simpson Thacher may well have inclined the law firm to conduct a less-than-strenuous inquiry. In addition to the millions in legal fees that Global Crossing paid Simpson Thacher each year, a number of Simpson Thacher attorneys owned stock in the telecom company. Both Gorton and the general counsel for Asia Global Crossing were Simpson Thacher alums, and Gorton's successor, acting general counsel Rhett Brandon, remains a full-time partner at Simpson Thacher—which is now busy representing Global Crossing in bankruptcy proceedings.

For its part, Simpson Thacher maintains that the firm had no legal obligation to conduct a more thorough inquiry into Olofson's accusations. Since no charges had been leveled directly at Gorton or Winnick, the review team had no reason to contact company board members, asserted the chairman of Simpson Thacher's executive committee, Richard Beattie, to the Los Angeles Times in February. Insisted Beattie, "I don't believe we did anything wrong." 

But Simpson Thacher shouldn't get off that easily—nor should the legal profession as a whole. When accused of professional misconduct, lawyers often argue that their code of ethics—with its emphasis on protecting the client—actually requires them to dispense cutting-edge (read: questionable) legal advice and to overlook a client's suspicious behavior in the name of attorney-client privilege. Many legal ethicists, however, say such arguments intentionally misinterpret certain aspects of the rules governing lawyers. And in other instances the rules themselves need to be changed.

As the cry for greater corporate accountability has grown, lawyers and pundits alike have proclaimed that the legal profession should not suffer the same public pillorying and regulatory crackdown as the accounting profession. Why? Because lawyers have a duty to protect only the client. "DON'T BLAME THE LAWYERS FOR ENRON: UNLIKE ACCOUNTANTS, LAWYERS' PRIMARY OBLIGATION IS TO THEIR CLIENTS—EVEN IF THAT ENTAILS HIDING INFORMATION," chided the headline of a February 21 Financial Times piece by Patti Waldmeir. Short of not knowingly breaking the law or knowingly enabling a client to do so, an attorney should have no restrictions placed on his or her counsel. Indeed, showing clients how to walk the fuzzy line between legal and illegal is a lawyer's obligation. "If the law has loopholes," noted Waldmeir, "he must point them out for his clients to exploit."

Even when a lawyer suspects his client of criminal behavior, many states have laws that discourage—and in some cases prohibit—him from telling anyone. Members of the bar have periodically tried to increase lawyers' public accountability by loosening these attorney-client privilege rules. But a vocal opposition has successfully countered with ominous scenarios about what would result: Clients will no longer be honest with their attorneys, attorneys will be afraid to launch zealous defenses of their clients, and our entire legal system will come tumbling down.

"Think how frightening it would be if your lawyer were also, in effect, the police officer, judge, and jury of the actions about which he or she is advising you," argued a recent piece by Julie Hilden in Slate.com. By compelling lawyers to judge a client's actions, we would "create a lawyer torn between the impulse to punish his client and to advocate for him," Hilden warns. "If your lawyer draws back from the edge because of her fear of the consequences, it may be you who is someday left hanging."

Reform-minded lawyers, however, point to a number of flaws in these apocalyptic claims. For starters, says Jonathan Macey, a professor at Cornell University Law School, one of the most pervasive problems in corporate law is that lawyers forget who "the client" is. "The lawyer's true ethical responsibility is to the corporation, not the individual officer who hires him, " says Macey. Too often, however, "a lawyer says, `Gosh, the CFO hired me, so I better be nice to him so he'll give me more business.' But this loses sight of the fact that the people paying lawyers' fees are not the CFOs, they're the shareholders." This is precisely the sort of thinking that helped fuel the savings-and-loan crisis, says University of Illinois law professor Richard Painter. Painter served on the ethics committee of the New York bar back in the early '90s when federal banking regulators were fighting to hold lawyers accountable for their part in the meltdown. "One issue was lawyers' failure to inform the full board when client firms were obviously in violation of federal law," he recalls. After much wrangling, the Office of Thrift Supervision settled lawsuits for tens of millions against some of the largest law firms in the country. That would have been a perfect moment for the bar to rethink its ethics rules, says Painter. "Instead, they circled the wagons and defended the lawyers involved, arguing that they didn't do anything wrong."

The new wave of corporate scandals has again spotlighted the need for change. In March, Painter drafted a letter to SEC Commissioner Harvey Pitt—signed by 40 reform-minded law professors—recommending that the commission enforce tougher ethics standards for lawyers. Three weeks later Painter received a polite rebuff from SEC general counsel David Becker, suggesting that the professor take the matter up with Congress. So Painter did just that, sending his recommendations to Senator John Edwards, who used them as the basis for an amendment to the Sarbanes-Oxley corporate-accountability act, which President Bush signed on July 30. The amendment directs the SEC to establish rules of conduct for all lawyers doing business with the commission. These rules must, among other things, require lawyers to report "evidence of material violation of securities law or breach of fiduciary duty" to a client company's general counsel or CEO. If the CEO or counsel fails to respond adequately, the lawyer must proceed up the chain of command to the audit committee or even the full board of directors.

Reformers say Sarbanes-Oxley should be uncontroversial since it allows lawyers to keep even the dirtiest of client secrets in the family. "It's really rather tame," says Stephen Gillers, vice dean and professor of legal ethics at New York University. "It does not mandate reporting outside, and so in no way compromises confidentiality or privilege." Nonetheless, the American Bar Association (ABA), which has repeatedly beaten back efforts at external oversight, lobbied hard against the amendment. "They literally refer to this as a sort of Pearl Harbor attack," says John Coffee, a law professor at Columbia University. The group is now pushing for Harvey Pitt to pen the weakest- possible rules, which Congress has required be set by the end of January—a credible threat given the association's history of strong-arming the SEC.

There's also the question of who will enforce the rules—and how. The ABA wants the SEC to continue its long-standing policy of deferring discipline to state courts, which have ultimate responsibility for lawyers in their jurisdiction but which often lack the muscle or will to battle the bigger firms. ABA President Alfred P. Carlton says he doesn't mind if the commission sets a few standards, so long as it doesn't try to enforce them. "The regulation of the legal profession is a matter of state law and the state supreme courts," the North Carolina native drawls. "For two hundred years that has been how it has been regulated—not by a federal regulatory scheme."

Even under the strictest rules, however, Sarbanes-Oxley may not be enough. An even hotter topic under debate is a lawyer's right (and responsibility) to report a client's misdeeds to outside parties such as the SEC. Currently, the ABA's Model Rules, which are nonbinding but often used by state courts in setting ethics rules, allow lawyers to breach confidentiality only when failure to do so is likely to result in imminent death or substantial bodily harm. Not long ago the ABA's Ethics 2000 committee recommended expanding this exemption to include preventing a client from "using the lawyer's services to commit a crime or fraud." The change was rejected—again on the premise that it would damage the client-attorney bond.

This argument is both simplistic and disingenuous, says Susan P. Kosniak, a law professor at Boston University and an expert in the rules governing lawyers. The premium lawyers place on "really standing by your client—no matter what—is the model for an advocate in the courtroom," she says. "The advocacy system depends on two advocates fighting it out in front of a neutral umpire, usually a jury." But that has nothing to do with the "transaction lawyering" involved in cases like Enron. "In transaction lawyering, there is no neutral umpire—no other side to present, to make discovery. ... All people get is the judgment that the lawyer has allowed to pass," Kosniak notes with increasing agitation. So when you transplant the zealousness ethic from the advocacy model to the non-adversarial transaction model, "what you get is the legal blessing of stuff that is so over the line." And, as recent scandals have shown, such practice often does a disservice even to the client. In transaction lawyering, explains Kosniak, counsel is often expected to gauge how close to the legal edge a client can walk without falling off. And it hardly benefits the client for a lawyer's attitude to be, "I've found fifty-thousand ways to walk on the precipice and not give a shit if you fall off because I'm not going to be liable."

Stunned by the passage of Sarbanes-Oxley and desperate to head off further government meddling, the ABA has pledged to revisit the confidentiality issue at its February meeting. But many reformers believe that to really get the legal profession's attention you need to hit lawyers where it hurts: the bottom line. To this end, they propose restoring the public's right to sue law firms for "aiding and abetting" financial crimes. Currently, thanks to the Private Securities Litigation Reform Act of 1995, private citizens can only sue lawyers if they are shown to be "primary violators" in an Enron- or Global Crossing- type implosion. The difference between a primary violator and someone who aids and abets a financial crime, explains Kosniak, is like the difference between a lawyer who personally signs fraudulent documents and one who merely counsels a client to do so. "A primary violator is basically at the center of things instead of just telling other people what to write."

Opponents claim that restoring this right would open up lawyers to frivolous suits and financially cripple law firms. But, as Kosniak points out, from the mid-'60s to the mid-'90s lawyers could be sued for aiding and abetting fraud, and the industry did not go under. It was only after firms lost millions in savings-and-loan-related suits that the ABA lobbied for—and received—protections. In 1994 the Supreme Court ruled that existing statutes did not provide for such suits, leaving Congress to decide the matter in its comprehensive reform act of 1995. "The documents are devastating as to what the lawyers did. But their response was not to clean up their act," Kosniak adds. "Their response was to get the Private Securities Litigation Reform passed," effectively shielding themselves from the fallout from future scandals.

Some observers believe that by refusing to seriously address ethics reform until this latest series of scandals forced Congress to get involved, the legal profession has outsmarted itself. For years lawyers, like accountants, have done as they please, assuming they would always remain totally self-regulating, says Coffee. "Both professions have behaved much like French aristocrats one year before the revolution. ... And now it's gonna cost both of them." That is, unless the public can be distracted long enough for the bar to convince regulators and lawmakers—yet again—that it's in everyone's best interest to let lawyers be the keepers of their own conscience. In which case, when the next financial meltdown occurs, expect to hear the same old refrain: "We don't believe we did anything wrong."

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